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Liquidity measures, liquidity drivers and expected returns on an early call auction market

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  • Carsten Burhop

    ()
    (Max Planck Institute for Research on Collective Goods, Bonn and University of Cologne)

  • Sergey Gelman

    ()
    (International College of Economics and Finance, State University – Higher School of Economics, Moscow, Russia)

Abstract

We analyze the determinants of illiquidity and its impact on asset pricing for purely call-auction traded stocks on Berlin Stock Exchange using 22 years of daily data (1892-1913). We use the Lesmond et al. (1999) measure of transaction costs to proxy illiquidity. We show that transaction costs were low and comparable to today’s costs. Liquidity was negatively correlated with active informed trading, particularly being low for small and distressed stocks and in crises times. Liquidity concerns were a major driver of asset pricing: we find significant illiquidity level and illiquidity risk premia as well as an explicit premium for informed trading.

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Bibliographic Info

Paper provided by Max Planck Institute for Research on Collective Goods in its series Working Paper Series of the Max Planck Institute for Research on Collective Goods with number 2011_19.

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Date of creation: Jul 2011
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Handle: RePEc:mpg:wpaper:2011_19

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Keywords: Transaction Costs; Liquidity Premium; Informed Trading;

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